Derivative Financial Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Note 9 - Derivative Financial Instruments

The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. The Company’s derivative contracts include swap and collar arrangements for oil, gas, and NGLs. As of March 31, 2013, and through the filing date of this report, the Company has commodity derivative contracts outstanding through the fourth quarter of 2015 for a total of 13.0 million Bbls of oil production, 119.0 million MMBtu of gas production, and 1.5 million Bbls of NGL production.

The Company’s commodity derivatives are measured at fair value and are included in the accompanying condensed consolidated balance sheets (“accompanying balance sheets”) as derivative assets and liabilities. The fair value of the commodity derivative contracts was a net liability of $3.6 million and a net asset of $38.7 million at March 31, 2013, and December 31, 2012, respectively.

Discontinuance of Cash Flow Hedge Accounting

Prior to January 1, 2011, the Company designated its commodity derivative contracts as cash flow hedges, for which unrealized changes in fair value were recorded to AOCIL, to the extent the hedges were effective. As of January 1, 2011, the Company elected to de-designate all of its commodity derivative contracts that had been previously designated as cash flow hedges at December 31, 2010. As a result, subsequent to December 31, 2010, the Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any such amounts in AOCIL. The Company had no derivatives designated as cash flow hedges for the three-month periods ended March 31, 2013, and 2012.

As a result of discontinuing hedge accounting on January 1, 2011, fair values at December 31, 2010, were frozen in AOCIL as of the de-designation date and are reclassified into earnings as the original derivative transactions settle. As of March 31, 2013, AOCIL included $1.1 million of net unrealized losses, net of income tax, on commodity derivative contracts that had been previously designated as cash flow hedges, all of which will be reclassified into earnings from AOCIL during the next twelve months. Please refer to Note 10 - Fair Value Measurements for more information regarding the Company’s derivative instruments, including its valuation techniques.

The following table details the fair value of derivatives recorded in the accompanying balance sheets, by category:

	As of March 31, 2013
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	23,364	Current liabilities	$	22,836
Commodity contracts	Noncurrent assets	8,571		Noncurrent liabilities	12,669
Derivatives not designated as hedging instruments		$	31,935		$	35,505

	As of December 31, 2012
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	37,873	Current liabilities	$	8,999
Commodity contracts	Noncurrent assets	16,466		Noncurrent liabilities	6,645
Derivatives not designated as hedging instruments		$	54,339		$	15,644

The following table summarizes the components of unrealized and realized derivative loss presented in the accompanying statements of operations:

	For the Three Months Ended March 31,
	2013			2012
	(in thousands)
Cash settlement (gain) loss:
Oil contracts	$	277		$	8,299
Gas contracts	(9,824		)	(15,212		)
NGL contracts	(2,245		)	1,477
Total cash settlement (gain)	$	(11,792	)	$	(5,436	)
Unrealized (gain) loss on change in fair value:
Oil contracts	$	3,789		$	29,491
Gas contracts	40,069			(17,634		)
NGL contracts	(1,494		)	(4,205		)
Total net unrealized loss on change in fair value	$	42,364		$	7,652
Total unrealized and realized derivative loss	$	30,572		$	2,216

The following table summarizes the effect of derivative instruments on AOCIL and the accompanying statements of operations (net of income tax):

		Location in Statements of Operations	For the Three Months Ended March 31,
	Derivatives		2013		2012
			(in thousands)
Amount reclassified from AOCIL	Commodity contracts	Other operating revenues	$	61	$	(1,034	)

The Company realized a net hedge gain of $99,000 and $1.7 million from its commodity derivative contracts for the three months ended March 31, 2013, and 2012, respectively, shown net of income tax in the table above. Realized hedge gains and losses are comprised of settlements on commodity derivative contracts that were previously designated as cash flow hedges and are reported in other operating revenues in the accompanying statements of operations. 

Credit Related Contingent Features

As of March 31, 2013, and through the filing date of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility syndicate. The Company’s obligations under its credit facility and derivative contracts are secured by liens on substantially all of the Company’s proved oil and gas properties.